Economic growth

Question 1

Define economic growth

Answer 1

An increase of real GDP through time

Question 2

What does growth of over the short term mean?

Answer 2

Growth as a result of greater use of existing resources

potential output is not affected
It will result in an increase in AD as an increase in AD will lead to an increase in real GDP

Question 3

Why may short-term economic growth increase?

Answer 3

1. Improved consumer and business confidence leading to increase spending by households and firms
2. Decrease in interest rates
3. Increase in government expenditures which would directly increase AD
4. Decrease in taxation would increase disposable income which would lead to an increase in consumption expenditures
5. Depreciation of the exchange rate ,faster growth of our trading partners and a decrease in the degree of protection domestic firms can all lead to an increase in net exports and thus growth

Question 4

Illustrate short term growth over three graphs

Answer 4

See notes

Question 5

Why might there be long-term economic growth?

Answer 5

1. Increase in the size of the labour force
2. Increase in the stock of physical capital
3. Technological advances
4. Advances in information and communication technologies
5. Improved institutional framework

Question 6

Illustrate long term growth over three graphs

Answer 6

See notes

Question 7

What is consequence of economic growth on living standards

Answer 7

• per capita income rises so individuals have greater so individuals have greater access to goods and services

BUT

• the economic growth may accrue only to the wealthiest. per capita income is an average–> no explanation of the distribution of income
• negatively impacts environment eg extreme weather conditions
• if it is jobless as result of adopting labour-saving technologies, living standards decrease

Question 8

What is consequence of economic growth on the environment?

Answer 8

Richer countries have more resources at their disposal to deal with environmental issues
ref to environmental Kuznets curve saying as countries grow pollution will initially rise and then it would decrease

BUT

EKC does not apply to dispersed externalities- co2 emissions
increase production has predominantly relies on the use of fossil fuels or on the depletion of common access resources–> NOT sustainable

Question 9

What is the consequence of economic growth on the distribution of income?

Answer 9

Higher tax revenues permit the govt to improve:

1. Pension schemes
2. Unemployment benefits
3. Other cash transfers
4. Improving policies that increase agricultural productivity
5. Infrastructure projects
6. Education and healthcare

HOWEVER it may increase income inequality:

1. if it relies only on certain skills
2. if market conc. is increased, charge of goods increase and wages decrease
3. trade liberalization
4. Income taxes becoming less progressive and transfer payments decreasing in size and scope
5. Decreased role of state and labour unions in 1980s